A recent Court of Appeal decision has overturned a TCC judgment in which a consultant was held not to have the benefit of any limitation on its liability due to a failure to agree final terms and conditions whilst working under a letter of intent. Whilst the case turns very much on its own facts, it highlights the risks and uncertainties that can be involved when proceeding with works or services under a letter of intent.
Arcadis Consulting (UK) Limited v Amec (BCS) Limited
Amec was a specialist sub-contractor on two projects and wanted to appoint Arcadis as it design sub-consultant for works on both projects. The parties entered into negotiations to agree a framework agreement under which it was intended both sets of works (and other future projects) would be carried out. During the course of the projects they exchanged various draft terms, each of which included a cap on Arcadis’ liability in one form or another.
In the event no formal contract was agreed and signed, and defects arose on the second project, a car park, in respect of which Amec sought to recover losses from Arcadis in the region of £40 million. Arcadis argued however that the parties had been proceeding under a set of interim terms which included a limitation of its liability to Amec.
The judge at first instance found that whilst a contract had existed between the parties, it was a “simple” contract which served only to secure performance and payment, and that none of the terms which the parties had been negotiating had been effectively incorporated – as none of them had received unqualified acceptance. As such, Arcadis’ liability was uncapped.
The Court of Appeal
Arcadis appealed the first instance decision and succeeded in having it overturned. The Court of Appeal found that in relation to the first project, Amec had instructed Arcadis to proceed under a set of “interim” terms pending agreement of the framework agreement (which terms contained a cap on Arcadis’ liability). By its conduct, and subsequent written confirmation, Arcadis proceeded under these terms which thus were found to be the terms which governed the contract for the first project.
Some months later Amec issued another letter of instruction for Arcadis to commence performance of its services for the second project on “the terms and conditions we are currently working under with yourselves”. The Court of Appeal disagreed with the first instance judge’s view that this should be interpreted as “working on”, i.e. under negotiation. Instead it held that the natural meaning of the words meant that the second project was to be governed by the same terms as the first project.
Once again, Arcadis was deemed to have accepted these terms by performance of its services, and by subsequent letter. The Court of Appeal found that the judge had made an error in concluding that the terms had not been agreed, and had not recognised that the parties had entered an interim contract pending the conclusion of a final agreement. In doing so he had created an “extraordinary result”whereby Arcadis would have accepted unlimited liability despite the fact that all of the draft terms which the parties had exchanged in attempting to reach agreement had contained a limitation of liability of one sort or another.
Conclusions and implications
This decision emphasises the need for parties to take care when using letters of intent / letters of instruction to proceed with works or services pending the conclusion of a final set of contract terms. Whilst these can offer a practical way of keeping a project moving, parties must be clear about what terms they are agreeing to, and be satisfied that they offer adequate comfort.
It is not uncommon to see parties, as was the case here, agreeing to extend the scope of a letter of intent to continue performance under it whilst the main terms or contract documents are still being negotiated. Again, this can be a convenient temporary solution, but makes it that much more important to be satisfied with the terms of the letter. Extending the letter too far can also cause parties to lose sight of settling the final contract terms whilst focusing on project delivery, and can deprive a paying party of its commercial leverage to agree beneficial final terms. It also risks negotiations being overtaken by events which both parties intended to be governed by the final contract and which are not addressed by the letter of intent – that was the position in the present case as regards liability for defects.
Whilst letters of intent can be useful tools to allow parties to push forwards with a project whilst finalising their contract, the following guidance should be borne in mind:
- keep the scope limited in cost, time and work packages to keep the parties focused on finalising the contract terms;
- include drafting in both the letter of intent and the contract when agreed that makes it clear that the contract terms supersede those in the letter of intent and that all preceding works and services are deemed to have been carried out under the contract terms (and that payments made to date shall be payments on account under the contract); and
- be clear about all of the key terms that are currently agreed to minimise any doubt as to the terms that the parties are working under.
Finally, despite the outcome of this appeal, the first instance decision should not be ignored. If the facts had been slightly different, Arcadis might well have been found to have entered into a simple contract to perform the works without any limit on its liability.
References: Arcadis Consulting (UK) Limited v Amec (BCS) Limited  EWCA Civ 2222.